An Exclusive Interview On Legal And Regulatory Aspects Of Trading!

People
16 November 2022

Thomas Heyden (CEO of The Trading Pit) sat down with Swaantje Dirks in a fascinating interview regarding the legal and regulatory aspects behind prop trading.

Swaantje Dirks is an expert in licensing and regulations. Her insight on regulated firms, license requirements for traders, the challenges faced by trading companies, and the future of regulations and compliance was incredible. As such, this interview provides tremendous value to the prop trading community. One major topic explored during this interview is Dirks's take on the regulations of prop trading firms.

A must-read interview for everyone seeking to understand the legal and regulatory aspects of trading!

TOM: This is Tom from The Trading Pit, and we are here with the lawyer Mrs. Swaantje Dirks. Please tell us a bit about yourself and What you do.

DIRKS: Of course, thanks for having me.

My name is Swaantie Dirks. I'm a partner at the law firm Graf Praschma, Heß & Rottloff in Frankfurt. We have specialized in banking and Capital Market laws for 30 years, and I'm also a specialist in industrial property law, including competition law, trademark law, and data protection law.

I am married and I have two children, 13 and 15 years of age.

In my spare time, I train two football teams of boys from 15 to 18 years of age.

TOM: Great! As you know The Trading Pit is a prop trading firm. So, what is your view on prop firms being regulated, how do you see the situation from your side?

DIRKS: Well, the question should be: Do prop trading firms need a license? And that depends.

Let’s say somebody does proprietary trading as a service for others or Market-makers or high-frequency trading. Then the firm needs be regulated and requires a license.

On the other hand, proprietary transactions would require regulation only if they are operated by a firm regulated for other Financial Services.

This means if they operate with Financial Services apart from proprietary transactions. Then, they would need a license.

TOM: Okay, that’s interesting to know.

So, I think there's a huge question for many people out there because of their need to feel safe with this. If you always work in a regulated business, you can frequently get in a lot of trouble there. And therefore, we need to clarify these things.

So, what do Traders need to know before choosing a prop trading firm?

DIRKS: Well, if I were to choose a prop trading firm.

Firstly, I would look at the location of the firm. For instance, the country in which the firm is located. Secondly, I would consider the regulatory measures to be complied with and what the prop trading firm offers. If there are various options for partnership, or it’s just some kind of contract.

Also, I would check if there’s a legal way of trading with this prop firm because not every firm is the same. Some are legally transparent, and some are not.

TOM: if somebody is starting with trading, does he need regulation or some license to trade?

DIRKS: Do you mean the trader himself, if he needs a license?

TOM: Yes.

DIRKS: Yes, if he trades on a non-employed basis and accounts for others himself, he would need a license. No regulation is necessary if he works at a prop Trading Company.

TOM: Let's say, for example, one of our Traders becomes very successful with one of the challenges at The Trading Pit.

What are the legal ways for a Trader? Is there anything you must distinguish? Anything on how a Trader could work with a prop trading firm more clearly?

DIRKS: Well, in my opinion, or our opinion, there would be four options depending on his legal status.

For example, If the trader has his license, he could trade using an account for the prop trading firm.

If he has a license just as a financial advisor, he can only offer trading advice to the prop firm. And then the prop firm would then decide whether to follow his advice or not.

The third option would be getting employed at the prop trading firm, as he would not need a license. The firm is trading its own money, and he can also do that as an employee.

The fourth option, for example, is if he doesn't have a license, he can trade using a demo account, for example, and give the firm trading signals. The prop trading firm could then decide whether to follow them or not.

TOM: So, he’s perfectly fine with all these options…

DIRKS: Yes, depending on his status, he has several possibilities.

TOM: So, how do you see the situation with prop firms compared with hedge funds? Are they the same, or are there some differences?

DIRKS: Prop Trading and Hedge-Funds are two things completely different from one another. Prop trading is trading your money without client order and has no service character for others. A hedge fund is a collective investment where the capital is managed by a professional Fund-Manager, with a wide range of strategies. So, they're two different things, I would say.

TOM: So, where do you see the biggest challenges in regulation for gaining clients?

DIRKS: On the one hand, we have the competition law, meaning if you have a website, for example, you are not allowed to use any misleading information or write “we are the best” or anything like that. On the other, data protection laws are hard to handle nowadays because they constantly monitor what you write.

You need to write something carefully to attract a client or potential client.

TOM: Do these restrictions apply to all countries or only to certain regions? Let’s say comparing Germany with Switzerland or Great Britain.

DIRKS: Well, it's the same for Europe because we have a data protection regulation that applies to all European countries that are members.

It is difficult for the USA.

And Switzerland for being a Third Country, just like England right now since they are no longer part of the European Union anymore. As for all countries being members of the European Union, we have the same data Protection Law.

TOM: Would you say that being regulated is still an advantage?

DIRKS: Well, I would say yes. When it comes to trust, it's always good to have a clear and transparent legal status. On the other hand, in terms of costs, it's questionable today because it costs very much to be regulated. All the things you must comply with, and all the people you employ for it. I would say it's questionable.

TOM: Thank You, Ms. Dirks, for joining us today to answer the questions. I enjoyed this. I am confident it was helpful to all our Traders on The Trading Pit. So, I thank the community for listening to us.

Conclusion: Being around elite experts and asking the right questions is key to building a unique trading community. Thomas Heyden found the opportunity and engaged with an established legal expert, covering all the legal aspects of trading. This wide-ranging interview was a huge success, giving an advantage to The Trading Pit by gaining a clearer insight into licensing and regulation.